Now that the write downs have slowed significantly, we can take a look at whether the stock returns of those companies with the highest discounts to book value actually outperformed. As we've noted previously, home builders tend to revert to a P/B of not much more than 1 (though they can be volatile, fluctuating with mortgage rates and other macroeconomic factors). Below is a chart depicting the returns in the last 1.5 years of these home builders versus their discounts to book values 1.5 years ago:

Higher discounts did not appear to translate into higher returns, suggesting that many of the discounts were indeed warranted. Normally, value investors would expect the stocks with the largest discounts to show the largest gains, so what happened here? What is likely missing here is how well these companies were capitalized. Discounts to book value tell you nothing about how indebted a company is relative to its assets.

As a side note, it appears that the stocks with the largest discounts showed the most volatility in their returns (i.e. as you traverse the chart from left to right, returns of both a positive and negative nature are of higher magnitude). It is likely that some of these stocks showed a strong likelihood of going bankrupt, and so the ones that did lost big while the ones that narrowly escaped showed excellent returns as speculative plays.